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Edited Transcript of Y.TO earnings conference call or presentation 15-May-19 12:30pm GMT

Q1 2019 Yellow Pages Ltd Earnings Call

MONTREAL May 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Yellow Pages Ltd (Canada) earnings conference call or presentation Wednesday, May 15, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Alan Eckert

Yellow Pages Limited - President, CEO & Director

* Franco Sciannamblo

Yellow Pages Limited - Senior VP & CFO

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Conference Call Participants

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* Aravinda Suranimala Galappatthige

Canaccord Genuity Limited, Research Division - MD

* Bentley Cross

TD Securities Equity Research - Associate

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to Yellow Pages First Quarter 2019 Earnings Release Call.

Today's conference call contains forward-looking information about Yellow Pages' outlook, objectives and strategy. These statements are based on assumptions and are subject to important risks and uncertainties. Yellow Pages' actual results could differ materially from expectations discussed. The details of Yellow Pages' caution regarding forward-looking information, including key assumptions and risks, can be found in Yellow Pages' management discussion and analysis for the first quarter of 2019.

This call is being recorded and webcast, and all of the disclosure documents are available on the company's website and on SEDAR.

I would now like to turn the meeting over to Mr. David Eckert, President and Chief Executive Officer. Please go ahead, sir.

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David Alan Eckert, Yellow Pages Limited - President, CEO & Director [2]

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Thank you. Good morning, everyone. Thank you for joining us on our call this quarter. Franco Sciannamblo and I, Franco our Chief Financial Officer, will be happy to answer all of your questions after each of us has a few introductory remarks.

This last quarter, the first quarter of the year, is the fifth quarter in a row that we have produced good, strong EBITDA minus CapEx. And on the back of that cash generation, we have been able, over that period of 5 quarters, to reduce our net debt that is not looking at leases, excluding leases, by over $200 million just since the end of 2017. We're very pleased to be able to make that kind of progress in strengthening our balance sheet and generating cash, and I would call your attention to a graph that shows that in our supplemental disclosure this quarter.

As we are now in the early stages of rejuvenating the way that we manage our selling effort, now that we have the shackles off and are able to manage with -- under the governance of our new sales labor agreements, having a small burden of debt, only a small burden of debt, we think is very beneficial.

I will point out, we've also virtually completed the process of shedding unrelated, unprofitable business, both subsidiaries and divisions and customers and segments and pricing and things, so we've made a lot of great progress on that over those last 5 quarters. And we're delighted then to be able to really buckle down and focus on our core business and on working on bending the revenue curve there, and we're very excited at the prospects of being able to do that.

I will also point out that today, we have announced that in the next 30 days, we will make approximately $90 million of payments on our debt in 2 separate pieces, and Franco will explain the details of that, but another very positive step toward strengthening the company.

I'd like to just turn over to Franco now for a couple of minutes, he can run through some numbers, and then as I said, we'd be delighted to answer all of your questions as always.

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Franco Sciannamblo, Yellow Pages Limited - Senior VP & CFO [3]

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Thanks, David. Good morning, everyone. I will take you through our financial results for the first quarter March 31, 2019.

Please note before I do that, as David just alluded to, following the completion of our process of shedding non-synergistic and unprofitable business, we have made changes to the way we report our results, so to our segmented reporting, we now have categorized our operations into 2 segments. The first segment is the YP segment, which provides small- and medium-sized businesses across Canada digital and traditional marketing solutions. The segment includes the operations of YP and of 411.ca. The second segment is what we call the Other segment, which includes YP Dine and Bookenda until their sale on April 30 of this year, and Mediative until liquidation, we completed that on January 31 of this year as well.

In addition, the operations of the businesses sold in 2018 are also included in this segment until their respective disposal dates, namely JUICE Mobile, RedFlagDeals.com, Yellow Pages NextHome, ComFree/DuProprio, Totem and Western Media Group. The comparative figures have been restated to reflect the changes sort of reportable segments. Please refer to our supplemental disclosure for the past 8 quarters, actually, we went back to Q1 2017 and rolled it all the way to this quarter of 2019 so that you have everything on an apples-to-apples basis on the new segmented reporting.

So let me turn to first on revenues. Total revenues for the first quarter of 2019 decreased by $54.5 million or 34.2% year-over-year and amounted to $104.8 million as compared to $159.3 million for the same period last year. The decline in total revenues for the quarter was due mainly to the divestitures in the Other segment as well as lower revenues in the YP segment.

So YP segment revenues for the first quarter of 2019 totaled $103.7 million compared to $127.8 million for the same period last year. The $24.1 million or 18.9% decrease is primarily due to the decline of our higher-margin YP digital media and print products; and to a lesser extent, to our lower-margin digital services products, which created pressure on gross profit margin.

Total digital revenues decreased 35.5% year-over-year and amounted to $78.9 million for the first quarter of 2019 compared to $122.4 million for the same period last year. The revenue decline was mostly attributable to the divestitures in the Other segment as well as lower revenues in the YP segment. The YP segment digital revenues decreased 18% year-over-year and amounted to $77.8 million during the first quarter of 2019. These revenues were adversely impacted by a decline in number of digital customers, partially offset by a third consecutive quarter of a higher spend per customer. The lower digital customer count is mostly attributable to a lower level of acquisition driven in part by our focus on profitability.

Total print revenue decreased 30% year-over-year and amounted to $25.9 million during the first quarter of 2019 as compared to print revenues of $37 million in the first quarter of 2018 as a result of lower revenues in the YP segment and the divestitures in the Other segment.

If we look at the YP segment, print revenues decreased 21.5% year-over-year and amounted to $25.9 million during the first quarter of 2019. The results were adversely impacted by a decline in the number of print customers and lower spend per customer.

Gross profit decreased to $64.6 million for the first quarter of 2019 compared to $90.7 million last year primarily due to the pressures from lower overall revenues and change in product mix in the YP segment and to the divestitures in the Other segment. Gross profit as a percentage of total revenues increased to 61.6% for the first quarter of 2019 compared to 56.9% for the same period last year due to the dilutive effect on profitability of the lower margins businesses in the Other segment in 2018.

The YP segment gross profit for the first quarter of 2019 totaled $64.1 million compared to $79 million in 2018 and the gross profit as a percentage of revenues remained stable at 61.8%. The decrease in YP gross profit is a result of the pressures from lower overall revenues and change in product mix. Our gross profit as a percentage of revenues has remained stable year-over-year as the revenue pressures were offset by higher efficiencies in sales and operations from optimizations and cost reductions as well as increased focus on the profitability of our products and services. These measures included workforce reductions, primarily noncustomer facing areas in the first quarter of 2018 and call center consolidations and optimization of our servicing model in the second quarter of 2018.

Adjusted EBITDA decreased by 5.3% to $45.4 million in the first quarter ended March 31, 2019, relative to $47.9 million for the same period last year. The company's adjusted EBITDA margin for the first quarter of 2019 was 43.3% compared to 30.1% for the same period last year. The decrease in adjusted EBITDA was a result of the revenue pressures in the YP segment as well as the divestitures in the Other segment. The increase in adjusted EBITDA margin for the first quarter ended March 31, 2019, was mainly due to the dilutive effect on profitability of the lower-margin Other segment in 2018 and reductions in both our cost of sales and other operating costs in the YP segment.

YP segment adjusted EBITDA for the first quarter of 2019 totaled $45.1 million compared to $46.9 million for the same period last year as a result of lower overall revenues and pressures from the change in product mix. Despite these revenue pressures, the adjusted EBITDA margin for the YP segment for the first quarter of 2019 increased to 43.5% compared to 36.7% for the same period last year. In addition to the measures impacting gross margin that I mentioned previously, the improvement in the YP segment was also due to reductions in other operating costs, including reductions in our workforce and associated employee expenses, reduction in the company's office space footprint, other spending reductions across the segment as well as an adjustment to the variable compensation expense, mainly due to employee attrition and previous year performances.

Our total workforce as at March 31, 2019, was 986 active employees, which represent a 55% decrease versus the same date last year. The YP segment represented 967 of these active employees and a 36.5% reduction versus last year.

Adjusted EBITDA less CapEx increased by $0.3 million to $42.8 million during the first quarter of 2019. That compared to $42.5 million during the first quarter of 2018. The increase in adjusted EBITDA less CapEx for the period ended March 31, '19 was mainly impacted by decreased capital expenditures, which offset the lower adjusted EBITDA.

Restructuring -- and the company recorded restructuring and other charges of $2.9 million during the first quarter of 2019 as compared to $11.2 million for the same period last year, consisting mainly restructuring charges of $2.7 million associated with workforce reductions. The company recorded net earnings of $12.7 million during the first quarter of 2019 and that compares with a net loss of $0.9 million during the first quarter of 2018. The improvement in profitability of $13.6 million for the 3-month period ended March 31, 2019, is explained principally by lower depreciation and amortization expenses and a decrease in restructuring and other charges.

Let me now turn to our expected debt payments. As per our 10% senior secured notes and debenture, the percentage of excess cash flows that are required to be used for the mandatory redemption payment is dependent on our consolidated leverage ratio, which is our debt divided by our EBITDA. If the consolidated leverage ratio on the last day of the mandatory redemption period is no greater than 1.5:1, the redemption required reduces from 100% to 75% of its consolidated excess cash flow.

For the first time since inception of the notes, the consolidated leverage ratio for the company as at March 31 was below this mark, therefore reducing our mandatory redemption percentage to 75%. The company also has the right through optional redemptions to redeem all or part of the notes at aggressive premiums of 102% until October 31, 2019, and 101% following the date until October 31, 2020, and at par thereafter.

The company will make a $90 million principal payment of its 10% senior notes during the second quarter of 2019, comprised of a mandatory portion of $50.5 million and an optional portion of $39.5 million. In addition, we will be paying accrued and unpaid interest of $0.9 million and an optional redemption premium of $0.8 million.

Please note that the $39.5 million optional redemption amount is included in the senior secured notes as part of the noncurrent liabilities on our interim condensed consolidated statement of financial position as at March 31, 2019. This is required by the accounting rules given that the notification to the trustee occurred subsequent to March 31, 2019. Adjusting for this, the total amount estimated to be paid on the senior notes in 2019 is now $120 million.

As at March 31, 2019, Yellow Pages had $154.2 million of net debt excluding lease obligations compared to $182.2 million as at December 31, 2018.

This concludes our formal remarks. Thank you for taking the time to join us this morning. We'll now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Aravinda Galappatthige with Canaccord.

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Aravinda Suranimala Galappatthige, Canaccord Genuity Limited, Research Division - MD [2]

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I'll start with the continued cost reduction, obviously, perhaps, even more impressive reduction in costs than one would have anticipated in Q1. When I look at the trend in the prior quarters in terms of overall operating cost and more specifically, the other operating costs are below GP line, I see significant step down. And I know part of it is divestitures, but it still looks like a significant reduction in costs from Q4 '18 to Q1 '19. I was trying to get a sense of what those elements were. Were there -- because I don't see a lot of restructuring costs in Q1, but there's still a significant reduction. I'll just start with that question.

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David Alan Eckert, Yellow Pages Limited - President, CEO & Director [3]

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This is David. Let me first try to answer a bit and then I think, Franco will probably come in as the cleanup batter here on this one. We have constantly looked at every dollar that we spend, and we don't differentiate between above the line above, below the line, operating or capital or anything. And continue to -- and I know all management team say they scrutinize their spending, but we're really serious about it, and we really have cut a lot. And let me just give you a couple of examples, on a consolidated basis, we used to have many thousands of employees, now we're less than 1,000 on a consolidated basis. The real estate footprint that we use, when we started, what was about 1.5 year ago, depending on how you count, we occupied between 28 and 35 different locations in North America, almost all of them in Canada, a little bit in United States at the time. So it depends on how you count, and again, this is consolidated. Now we operate 3 plus a little one, 3 -- so call it, kind of, 3 and a little -- 3.1 locations. And the amount of square feet that we operated in -- at the beginning of that period of time, which was late in 2017, now compared to that is down by slightly more than 3/4. So we have slightly less than 1/4 the amount of square feet. Those are -- I love getting rid of spending that's like leases and rent and things like that because those actions, in no way, harm anything that matters. A square foot of real estate never sold a single dollar of revenue and never made a single one of our customers delighted. So those are just examples of some changes that are large and dramatic in just the last 5 quarters that are still showing up newly, certainly, in this first quarter and they have propelled us to not only really good EBITDA and really good EBITDA minus CapEx, but I think pretty huge cash generation and the ability to pay down whether you look at net debt or whether you look at the $90 million of debt payments we're going to make in the next 30 days or the $120 million that Franco just said we expect to have made during the calendar year. So it's a lot of things, it's all over the place and it's in particular with a focus to not having any negative effect on our customers or our revenue.

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Franco Sciannamblo, Yellow Pages Limited - Senior VP & CFO [4]

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And what I would add as well is, other areas, we're seeing the reductions flow through is just like we're spending a lot less CapEx, right, than we use to, or the related IT support, the related project expenses that we don't capitalizing in IT that's much lower. We have lower bad debt expenses not only because of lower revenues, but also because of going after profitable customers. And we did have some adjustments for variable comp as well this quarter just because people leaving after year-end and some of our long-term incentives that didn't materialize, so we did have some adjustments for that. But I think it's all those things that are causing the reductions. But by and large, the people, the real estate and all the related expenditures.

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Aravinda Suranimala Galappatthige, Canaccord Genuity Limited, Research Division - MD [5]

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For that -- and then just related to that, maybe, Franco, you can talk about the restructuring charges that we can expect for the year. Just so that we sort of landed us the accurate free cash flow estimate for the year. It doesn't look like a lot in Q1, but are you still looking at some degree of restructuring charges that will be incurred over the next couple of quarters?

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Franco Sciannamblo, Yellow Pages Limited - Senior VP & CFO [6]

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Well, by definition, these are nonrecurring items. So I know we have them every quarter. But they -- we are -- we don't have final items line of sight, but I think the rates that you're seeing in this quarter are more in line with what you'll be seeing going forward. But given that we're now at 986 employees, you're not going to be seeing the level that you saw in prior years. The amounts also you see is some amounts that we paid for vacated leases, sometimes you see some adjustments flowing through there. But I think the big large ones are probably behind us, but again, we -- hard to anticipate those.

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Aravinda Suranimala Galappatthige, Canaccord Genuity Limited, Research Division - MD [7]

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And then I guess I'll get to sort of the revenue side of the business. David, obviously you have a lot more flexibility now following the union deals, debt is being paid down rapidly. What's -- obviously, we still continue to the see sort of the customer count reduce at a similar rate as we have in the past. What's the plan to sort of arrest the decline in -- or moderate the decline in the digital side of the business and sort of go forward with a plan to sort of to capture your fair share of the digital market in Canada? What's the approach from here on?

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David Alan Eckert, Yellow Pages Limited - President, CEO & Director [8]

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Yes. And first, it is -- obviously, it's completely unacceptable to have the revenue curve looking like it has looked. That is not the way it needs to look. That's not what we are anticipating or seeking. I am content with the sequence of what we've done over these last 5 or 6 quarters. The situation 1 year, 1.5 year ago was a lot more dire than, I think, maybe people appreciated. I think we've accomplished tremendous amounts. We're not going to waste time patting anybody on the back. And -- but the sequence has been right. And you're absolutely right that the now and not very long ago completed collective bargaining agreements governing how we manage our sales force have -- one individual referred to it as removing the shackles and have removed the shackles. So literally just in the last kind of during the quarter that we are just reporting on, we're able to begin managing our sales force in ways that any and every competent sales force in a competitive industry has been managed for half a century.

And one could say that given the constraints that we had and the inability to do just basic things, it's kind of surprising that our revenue curves weren't even worse to tell you the truth. I'm very bullish that now we're able to do just basic things, for example, we can reward our salespeople differentially based on the profitability of what they sell. We're able to measure typical basic metrics for our telesales and our face-to-face salespeople and manage them based on basic metrics. We're able to manage the hiring and employment and career path and decisions of people based on performance, not just seniority. We are able to do just a whole bunch of basic things that any sales force that is in even a slightly competitive business absolutely has to do if you're going to manage it correctly. And so we've kind of just begun. We put in place entirely new variable compensation plans that we think are highly rewarding and highly motivating. And our purpose throughout this was never to spend less on our sales force, it was never to pay our salespeople less. It is always to actually pay more to salespeople who generate more and to align the interests of our individual salespeople with the interests of the company and its other stakeholders, its other employees, its investors and so on. And so for the very first time in forever, we're able to do that and that's just kind of hit the ground and

I mean it's not much of an exaggeration to say in recent weeks, I mean you -- kind of theoretically on January 1 -- but -- and we're able to -- another example, our collective bargaining agreements always compelled us at the beginning of each year to reallocate all of our accounts so that every sale -- this is the face-to-face salespeople, and indeed telesales too, so every salesperson at the beginning of the year had an equal book of business, regardless of whether that salesperson had done a great job in the prior year or had not done a great job in the prior year. We were legally compelled to take accounts away from those who had grown their book of business and give those accounts to people who had shrunk their book of business. You could imagine the effects of that kind of policy. Now our salespeople can be confident that if they do the hard work of pleasing our customers and trying to grow their book of business, then come the end of this year, on January 1, 2020, we're not going to grab and take away a bunch of their business because -- and punish them for having been successful. On the contrary, it's our every intention to let them keep those customers that they have carefully cultivated through this year, even if maybe it hasn't yet generated more revenue this year, but maybe it's about to generate more revenue at the beginning of next year because of good cultivation and good customer service and good hard work. These are just fundamentals and especially for anybody who's bred like a salesperson. And so we are happily paying out significant amounts of variable compensation to both our face-to-face salespeople and to our telesales people based on actual results, based on profitability, based on growth, the things that every investor and every employee of this company should care about and that the company cares about. If those things don't make a difference in our revenue curve, I'll eat my hat because every sales force in the world that I'm familiar with in any industry that's competitive, not talking about the government or something, but in any competitive business, which certainly our business is, those things matter. And to any salesperson, those things matter.

So works -- and I haven't even -- I could talk for another 20 minutes on all the other things that we're able to do now, but for the first time in forever. And so in a way, I'm surprised we didn't do -- hadn't done even a whole lot worse in recent times as our industry has gotten more and more competitive compared to, say, 15 years ago. But we -- so we got the shackles off for the very first time. We are working very hard to make -- we've made some frankly radical changes in compensation and management and all kinds of other things that I think are big changes, and change is never easy, but they're all changes very much for the positive. And for the benefit of everybody and especially our salespeople that it's benefit for them unless they're just not going to do anything. But any salesperson who actually has talent, and we have talented salespeople. We have good people. I am always impressed with our salespeople. And their spirit and their capability and their determination, never been in question. And now we can align their interests and our interests and the interests of all the different constituents. So I'm actually pretty excited. It takes time and we're in the early stages of the baseball game, we're in the first or second inning here. So it's just getting started, but we've got good pitching and good fielding and a good bullpen. So we're loaded for bear.

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Aravinda Suranimala Galappatthige, Canaccord Genuity Limited, Research Division - MD [9]

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Okay. And just lastly, can you please just confirm the -- just the proceeds from the divestitures in April? I think it was April 30, including YP Dine.

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Franco Sciannamblo, Yellow Pages Limited - Senior VP & CFO [10]

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Yes. It's in our subsequent notes of our financials, but it's $2.2 million and about $400,000 of that is in escrow for about a year. We'll get it back in about a year. It's just regular conditions, ensuring that nothing comes up, reps and warranties are okay. So approximately $2 million.

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Operator [11]

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(Operator Instructions) The next question is from Bentley Cross with TD Securities.

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Bentley Cross, TD Securities Equity Research - Associate [12]

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I just wanted to follow-on with Aravinda's question on the OpEx. You highlighted some of the workforce reductions and real estate and everything else. But I mean, the headcount hasn't changed that much relative to Q4. So is there any onetime items? Just maybe that variable compline? Can you kind of level set for going forward?

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Franco Sciannamblo, Yellow Pages Limited - Senior VP & CFO [13]

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Yes. I mean the variable comp adjustment is in the -- was in the about $3.5 million range. So maybe worth about 3 to 4 points, so about 37 -- well, just adjust the EBITDA minus CapEx. That's about the only really pure nonrecurring item. The rest is just...

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Bentley Cross, TD Securities Equity Research - Associate [14]

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Okay. And then going forward, just based on your comments, it sounds like less restructuring, so maybe we'll still find some savings, but not to the extent that you have so far. Is that a fair characterization?

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Franco Sciannamblo, Yellow Pages Limited - Senior VP & CFO [15]

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Yes. I mean we -- the DNA is completely different now. It's in everyone's DNA to keep looking and we keep our supplier agreements come to their due date, even sometimes before. Continuing to grind down either the rates or the amount that we consume on every single supplier contract, given that we're less people and we're a more focused and efficient organization. So I think we're not done and we'll never be done. But it would be unrealistic to expect the level that you've seen in the prior year, that's for sure.

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David Alan Eckert, Yellow Pages Limited - President, CEO & Director [16]

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And I would say it is not only because of less spending to reduce, but also, at least for the moment, our focus has become seeing what we can do about the revenue curve. And it is -- and it's been very intentional that the sequence here has been to very much rightsize our spending, make dramatic reductions in the burden -- the debt burden, make massive increases in the cash-generation characteristics of the company, get our shackles off of our ability to manage the thing that's most important in every single legacy Yellow Pages company in the world, which is our sales force that goes out to sell and deliver things to the small- and medium-sized enterprises of the company in which we operate. And so that sequence has been intentional. And then with the shackles off from -- with the new collective bargaining agreements governing the sales force to put into place modern and competitive ways of managing our telesales and our face-to-face sales effort and that's what we've just been able to -- we've landed on those beaches just in the last couple of months. And so fighting on those beaches that -- it's not either or it's not inconsistent to do that and to further reduce our spending. But in terms of emphasis, there's probably a greater emphasis on that at the moment and a little bit lesser emphasis than there has been in recent moments on spending reductions. Okay?

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Bentley Cross, TD Securities Equity Research - Associate [17]

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That's good color. And lastly just on the print side, slight improvement in the quarter. Is that just kind of noise? Or is that some of the fruits of your labor kind of shining through? Or any color you could add would be helpful.

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David Alan Eckert, Yellow Pages Limited - President, CEO & Director [18]

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Look, first thing, print is our friend. I know some of the legacy Yellow Pages companies in the last 5 or 10 years have run around and beat the digital drum and digital's great but -- and have kind of denigrated the print business. Print is great business and it's a great business in at least 2 ways. One, it generates very good profit and cash flow and still does and should in the absolutely foreseeable future. So from the standpoint of the company and its employees and its investors, it's great. And from the standpoint of our customers and clients and our -- the advertisers, it's still in many, many, many most situations a very, very effective way for small- and medium-sized enterprises to invest just a little bit of money and help generate customers and traffic. So it's a great business. I well understand that overall, there is not any country in the world where it's growing or likely to grow, but if a company like ours can do things so that the rate of decline is 100 -- a percentage point less or 2 percentage or 3 or 4 or 5 and there are things that we can do, then that is tremendously valuable. And so we are absolutely focused because the value of our print revenue shrinking at, say, 18% or 20% rather than shrinking at 25% or 30%, which some companies, some legacy Yellow Pages companies have print shrinkage at 25% or worse, the value of that difference is very large. And we have a print business here that can last for a very good -- very long time. We need to manage it aggressively and with our eyes open and with our brains turned on, but it's a great business. So it's not like we're just a cork in the ocean and waves come up and down and we kind of oh, well, this quarter, it's going to shrink at 27%. And you know, no, we very actively on a book-by-book and customer-by-customer basis are managing it. And so I don't view any of that as an -- of course, there's going to be a little bit of randomness or noise, but in general view of it, it is an accident. It's all intentional and I would hope that we can do a better job than the average around the globe does in the rate of shrinkage of the print revenue. I'm not forecasting print revenue growth above 0, but if we can -- if we can mitigate and minimize the amount of shrinkage, it's of high value and that's what we intend to do.

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Operator [19]

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There are no further questions registered at this time. So I would like to turn the meeting back over to Mr. Eckert.

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David Alan Eckert, Yellow Pages Limited - President, CEO & Director [20]

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Well, we certainly thank all of you for joining us again this quarter. We are -- we don't take lightly the tasks in front of us. We have a lot of work still to do, but we feel like we've got some good momentum and we appreciate the support of all the people on these calls and we look forward to chatting with you again in another 90 days. Thank you very much.

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Operator [21]

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Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you all for your participation.